As we near the ninth anniversary of the current bull market the U.S. economy, by most indications, is chugging along nicely. As stocks continue to rise, the economy grows and unemployment falls, economists look to inflation as the next potential tripwire. For the last several years, the Federal Reserve has targeted 2% inflation as the acceptable level of price appreciation. However, even as the economy has improved, hitting this target has been largely elusive. In December, the core inflation rate was 1.8% year over year, below the Fed’s 2.0% target. The Fed prefers the Personal Consumption Expenditures Price Index. Its core inflation rate was 1.5% year over year as of November 2017.

This lukewarm inflation has led some to question the inflation target, including William Dudley, the president of the Federal Reserve Bank of New York. In a recent interview, Dudley said it would be “prudent monetary policymaking” to put the central bank’s method of managing the economy on the agenda this year, according to FT.com. Even Ben Bernanke, the former Fed chairman who helped implement the 2% inflation target in 2012 has said the central bank should revisit its inflation target.

Those calling for a review of the inflation target believe the current 2% target may prevent the Fed from raising interest rates very far during the current expansion, and leave it with little capacity to cut borrowing costs during the next recession.

AAII Weekly Survey Question

On Friday, the yield on the 10-year U.S. Treasury climbed to its highest level since 2014, according to CNBC.com. This is a sign that investors believe the Fed will continue to raise interest rates, in part because of an expected rise in inflation.

To get an idea of how worried our readers are about the specter of inflation, last week’s AAII survey question asked:

How worried are you about inflation?

Here are the results:

In all, 2,472 readers participated in the survey.

At this point, most readers are not concerned about inflation: 47% are not very concerned and another 7% are not at all concerned about inflation.

On the flip side, only 6% of readers are very concerned about inflation and 41% are only somewhat concerned.

Weekly Special Question

As I alluded to earlier, the Fed is considering reviewing its 2% target inflation rate. I assume this would entail targeting a lower inflation rate. This, in turn, would give them more incentive to raise interest rates. Many central bank watchers worry that the Fed has kept interest rates too low even as the economy has grown. As a result, if the economy does start to stagnate, the Fed wouldn’t have much room to lower interest rates to reignite growth.

Monetary policy is how the Federal Reserve can influence economic activity and entice or curb inflation. The primary component of monetary policy is controlling short-term interest rates. Interest rate adjustments impact the levels of borrowing, saving and spending in an economy. The Fed can also implement monetary policy by controlling the money stocks. Via “open market operations” the Fed purchases and sells government bonds. Buying bonds injects new dollars into the economy while selling bonds pulls dollars out of circulation. So-called quantitative easing (QE) measures are extensions of these operations. Additionally, the Federal Reserve can change the reserve requirements at other banks, limiting or expanding the impact of money multipliers. Economists continue to debate the usefulness of monetary policy, but it remains the most direct tool of central banks to combat or create inflation.

To see how our readers feel about the Federal Reserve’s ability to control inflation, our latest special question asked:

How well-equipped do you think the Federal Reserve is to ward off rising inflation?

In all, we received 287 responses to the question.

Probably not surprisingly, our readers are split as to whether the Fed is equipped to control inflation. Thirty-six percent of respondents (36.2% to be exact) feel that the Fed is not equipped to control inflation while 35.9% feel that the central bank is well-equipped to control inflation. The remaining 27.9% are unsure as to the Fed’s ability to control inflation.

Here is a sampling of the reasons why our readers either do or don’t use a financial adviser:

“As is typical, the Fed will be behind the curve on inflation.”

“Better than in previous climates like this.”

“Better than to ward off recession. Having the equipment and knowing how to use it aren’t necessarily the same thing. Maybe they should be reading the instructions before they need to do something.”

“Considering the Fed actions over the past decade and their current balance sheet, the Fed cannot do much.”

“Due to low rates, they don’t have much power to use to control inflation.”

“Having witnessed what happened to the prime rate in the late 1970s, I am sure the Fed has the tools. However, use of these tools will exacerbate the federal deficit proportionally and create perhaps a severe recession. So there may be an unwillingness to use the tools by the Fed.”

“I believe they have no intention to ward off rising inflation. They have been trying to quick start it for the past 11 years. Everything they are doing now seems to be a desperate move to get interest rates high enough and fast enough to have enough room to lower them again.”

“Until the Fed starts equipping itself with good risk analysis models and consequential analytic tools, it is not very well equipped to do very much.”

“It’s on a tightrope—raise rates too fast and possibly slow capital investment by companies; raise rates too slow and hurt people on fixed incomes who have to pay higher prices because of the increasing price inflation.”

Everybody has an opinion! Why not give us yours? Participate in our weekly member poll, updated every Monday, and see the results online at www.aaii.com/memberquestion.

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One thought on “AAII Survey: Readers Split Regarding Fed’s Ability to Control Inflation”

The jokes about economists are legion.
The dearth of AAII members answering the question about control of inflation suggests that most readers (including myself) do not know the economics that underlie the theories used in such control. History is not helpful though the data can be massaged to support different approaches.
I would like AAII to consider publishing a short (if possible!) article on “Inflation 101”.